Friday, October 2, 2009

What is the purpose of Social Security? Is it a welfare program or an investment program?

Democrats talk of the SS tax as a regressive tax but also argue that SS is an investment. If SS is a welfare program why is most of the money paid out to the rich and middle class? If it is an investment/insurance program why do they call FICA a tax and complain about the poor paying a high tax rate? If it is an investment program why does the value go to zero on death. If it is insurance against out living one's support system and savings why do the rich get a bigger benefit payout?

The rich and middle class do not need SS they can generally take care of themselves.

One of social security’s effects is that though children still provide for their parents by paying the SS tax, the parents look to government and honor Government for taking care of them in old age. They show appreciation to government (and politicians particularly FDR) for the SS benefit rather that to their children who actually pay for their SS. They do not see it, but the money is coming from their children. Studies have show that government funded pensions weaken family bonds. It has become shameful to rely directly on your children in retirement but perfectly OK if the money passes through government. This seems a bit absurd.

Even the economics of this are bad! Most families would be better off providing in kind benefits (like housing) to their parents rather than money (which is what SS gives). It more efficient to have one better house rather than 2 homes. The elderly can contribute around the house but instead we have more separate living. Some of this surely would have occurred without SS as people have gotten wealthier but SS surely contributed to the current state of the family.

According to some writings of FDR, SS was implemented to encourage older workers to retire in the mistaken belief that this would increase employment for younger people. This was a mistaken belief because the SS tax tended to decrease employment, few people in government at that time understood that.

So what to do, it seems unlikely that Amercans would ever vote to abandon SS. I see no practical way to get rid of SS now, so I propose that it be welfareized. To welfareize it we should:
1. End the charade of the separate SS tax and fund the program from general revenue. It is not now nor ever was a retirement plan, it has always been a pay as you welfare program.

2. Make the pay out (the check recipient receive each month) the same for every one, currently the more money you made in your work years the more SS you receive.

3. End the charade of the “trust fund” a “trust fund” never existed and cannot really exist (apart from the US government buying foreign bonds which would be politically unpalatable and somewhat risky) because when you are the source of all money as the federal government is it impossible to save up money for later use. Again the program has always been pay as you go where the money the young people pay goes to current recipients.

4. Increase the age one needs to reach to start collecting SS. When FDR started the program the average life expectancy was 62 years and to start collecting SS you had to be 63 years old. People today are much healthier at 63 than people were in the 1930s and most jobs are less taxing .

All of this would help decrease the tax burden on young workers and encourage people to seek other ways to live in their old age.